How to remove barriers to financing agrifood organizations in developing countries

By Johan Thuard, West Africa Investment officer

In developing countries, financing agricultural activities represents a major challenge that is often underestimated. According to ISF Advisors, only 34% of the $160 billion needed each year to support the 220,000 small and medium-sized agricultural enterprises in Southeast Asia and sub-Saharan Africa is covered by formal financing[1]. This lack of financing creates an annual deficit of $106 billion, with serious consequences for the sector’s dynamism. In particular, its ability to meet the challenges of food security, job creation and reduced vulnerability for the 1.3 billion people who depend on agriculture in these regions [2]. This deficit is colossal; to better understand its scale, it is almost equivalent to the $113 billion allocated to fossil fuels by the main banks of the European Union in 2023 [3]. This critical situation cannot be resolved by the market alone.

But what explains such a deficit? At SIDI, through our experience as a solidarity investor active for over 40 years, we seek to shed light on this question. In this context, SIDI finances cooperatives and agri-food SMEs in developing countries. These organizations work with small-scale producers in support of family farming, both upstream – by facilitating their production and their transition to sustainable agriculture – and downstream – by developing outlets through the processing and marketing of agricultural produce. We identify three major barriers to the mobilization of financing by agricultural organizations: problems of identification, preparation, and an imbalance between the risk and profitability of transactions. These barriers particularly affect smaller, less mature organizations. These organizations find themselves in the “missing middle”, while also being ill-suited to the requirements of formal financiers (commercial banks, international financiers, donors, etc.). This article looks at these three barriers, focusing specifically on debt financing, and proposes solutions to overcome them.

Better identification between agri-food organizations and funders

For agri-food organizations, particularly those with little experience of fund-raising, it can be difficult to determine which funders to approach, given the fragmented nature of the ecosystem. Each funder has its own strategic priorities, investment criteria and areas of operation, which can be highly specific and difficult to understand externally. Similarly, for international players, identifying new opportunities not yet financed by other players can be a complex task, especially for organizations that are not members of entrepreneurial networks or that operate in remote areas. Finding new financing opportunities requires in-depth knowledge of the local economic fabric. This represents a challenge for investment officers, as the areas to be covered are vast. To illustrate, at SIDI each investment officer is responsible for three to four countries, so deepening our knowledge of local players is a gradual, long-term process. To enrich our understanding of the field, we regularly collaborate with allied organizations, whether local or not. For example, SIDI invests in local I&P funds, such as SINERGI in Burkina Faso, which focus mainly on agricultural sectors. We have also established a partnership with the Ethiquable cooperative to finance and support some of their supplier cooperatives, and maintain close links with organizations specializing in agricultural value chains, such as Nitidæ. At the same time, we are strengthening our local presence with the opening of two offices in Lomé and Kampala, from which we conduct much of our business in sub-Saharan Africa.

The challenge of preparing to raise funds

Fund-raising is a complex process, requiring specific resources and skills. Sometimes, there is a gap between the prerequisites that funders may have to validate a transaction and the capacity of local organizations to meet them. This gap becomes particularly problematic when it involves the fundamentals – operations, social and environmental impact (particularly for impact funders), finance, team, market, or data reliability. Developing cooperatives and SMEs are often not equipped to meet these expectations. This is particularly true for organizations that are growing organically and lack a strong management team. We also note that these organizations may find it difficult to identify their own areas for improvement, nor are they able to overcome them on their own. To overcome these shortcomings, it is important for organizations to have access to specific support to prepare for financing. This is where SIDI’s offer, which combines financing and support, comes into its own. Based on a diagnosis by an investment officer, SIDI can offer not only financing, but also support tailored to the organization’s needs. SIDI works with a number of facilities, including the ACTES Foundation, the SSNUP program and the AT facility of the FEFISOL II fund, to meet the support needs of prospective and existing partner organizations. There are also investment readiness programs that will reinforce the fundamentals while supporting organizations in the preparation of their funding applications – market analysis, creation of business plans or other documents intended for investors. Some of these programs also include prospecting and matchmaking. There are many such programs, often financed by donors and implemented by consulting firms. Examples include Activ’Invest in Senegal, Invest Salone in Sierra Leone, and CrossBoundary, which helps agri-food companies raise funds in several sub-Saharan African countries.

The imbalance between risk and profitability in agricultural financing

A study carried out by Dalberg on 3,500 loans granted to agri-food SMEs by international financiers reveals that half of all loans between €250,000 and €500,000 are not profitable. One of the main reasons for this imbalance is the high and rising cost of risk. In particular, agricultural production is under increasing pressure due to its growing exposure to climatic disturbances. Furthermore, agri-food organizations often operate in markets where product supply and demand are not systematically correlated. As a result, some sectors experience cyclical crises, putting operators under pressure and increasing the risk of default. This risk causes the market to tense up, and it concentrates on certain well-defined segments:

  • Organizations with a lower risk profile, generally larger, more mature organizations with a solid financing history and/or able to offer guarantees.
  • Short-term financing, often in the form of working capital, instead of medium-term loans to finance equipment or investments
  • High financing rates to cover transaction costs

As a result, the market remains relatively static, with a limited number of organizations already known to the sector and financed, and little openness to new partnerships. For a financier like SIDI, whose mission is to be additional, notably by acting as the leading international investor for certain partners, managing this risk is an essential challenge. This is achieved through several approaches: on the one hand, portfolio diversification across different sectors (such as microfinance and agriculture) as well as more or less mature organizations; on the other hand, SIDI’s business model enables it to take greater risks, thanks to its philanthropic shareholding and access to certain guarantee tools. These elements are essential if we are to ” intervene where others do not go “, and thus support high-risk organizations, sectors and regions. This also gives us the possibility of financing particularly risky organizations and/or not being profitable on certain transactions when this is justified by strong additionality and a significant social or environmental impact. From this experience, it is clear that we need to have access to guarantee mechanisms or subsidies so that financiers can be more additional, have a greater impact and thus make the sector more dynamic. Effective solutions already exist, starting with the Aceli program operating in East Africa. This program, dedicated to financing the agricultural sector, offers financiers subsidies to reduce transaction costs, and guarantees to reduce the cost of risk. The value of this program also lies in its ability to minimize market distortions, while encouraging financiers to support the least well-served companies: grants cover only part of the costs, and are higher for companies that have never raised institutional funds, or that have a higher social or environmental impact. This is the kind of example that deserves to be better studied and replicated in other regions, given its proven effectiveness. In a context where the vulnerability of producers and the challenges of food security are increasingly pressing, it is crucial to work towards reducing the barriers to financing agri-food organizations in developing countries. In addition to offering some food for thought, this article is an invitation to all those who wish to collaborate and develop concrete solutions for a more dynamic, socially just and ecologically sustainable sector.

Johan Thuard, West Africa Investment officer

 

[1] ISF Advisors, The state of the agri-SME sector – Bridging the finance gap, 2022 [2] ISF Advisors estimates that this concerns 260 million households – ~1.3 billion people – considering family farming as an integral part of their livelihood in South-East Asia and Sub-Saharan Africa [3] Banking on Climate Finance Chaos, Fossil Fuel Finance Report, 2024

The MFI ALIDé, SIDI’s new partner in Benin.

SIDI’s development in West Africa

SIDI’s deployment in Benin is part of its development strategy.
The opening of SIDI’s regional office in Lomé, Togo, in 2023 will strengthen our proximity to our partners in West Africa and facilitate the creation of new partnerships.
This geographical proximity allows for greater flexibility in carrying out missions, including prospecting.
It was during one of these missions to Benin that SIDI forged ties with ALIDé, leading to this new partnership.

ALIDé, a partner aligned with SIDI in a difficult Beninese context

Thanks to its 17 points of service, including 10 branches and 85 agents, the ALIDé microfinance institution is working to improve the living conditions of vulnerable and low-income populations throughout Benin.
Founded in 2006, ALIDé currently serves some 50,000 customers, offering essential financial services.
This enables them to realize both personal and professional projects.
In 2022, ALIDé strengthened its social commitments around strong values as part of the revision of its social strategy.
The main commitment concerns women, with the aim of providing them with greater support to promote their social and economic inclusion.
Clear, measurable indicators have been defined for this purpose.
The Association supports projects in various sectors, including agriculture, through non-financial services and dedicated financial products.
This is an ambition that SIDI supports, in a general context of worsening risks in the agricultural sector and an economic situation impacted by strong political decisions at local level since 2023.
Indeed, developments in the political and economic situation in Benin are marked by a timid resumption of trade transactions with Niger (80% of transit through the port of Cotonou comes from Niger) despite the decision taken by ECOWAS member countries, including Benin, to resume trade with Niger and the reopening of borders with this country.
In addition, in 2023, government intervention in the setting of prices in certain sectors such as soya has had a slight impact on the smooth running of the campaign for some ALIDé producers. Thus, ALIDé’s work is essential both as a financier and, above all, as an advisor to guarantee the continuity of its members’ activities in a constantly changing environment.

Partnership objectives

The partnership between SIDI and ALIDé will have a dual dimension in line with SIDI’s strategy: financial contribution and technical support.
Several areas of intervention and areas of support have been identified to support the development of activities and the finalization of its digitization process initiated in 2018.
These areas will be defined and prioritized by mutual agreement between the association and SIDI.
This partnership will enable ALIDé to increase its medium-term financing capacity.
At the same time, it marks the return of SIDI’s activities in Benin, where it no longer had an active partnership at the end of 2023.
SIDI, always committed to long-term partnerships, intends to continue its deployment in this country, supporting players such as ALIDé who are committed to fulfilling their social mission.

Gain a better understanding of how Abakundakawa, a Rwandan coffee cooperative, is helping to change the lives of its members.

Productrice de café de la coopérative abakundakawa

The Farmer Thriving Index, a new initiative designed to better assess changes in the lives of small-scale farmers.

The Farmer Thriving Index (FTI) was created by 60Decibels, a company specializing in social impact measurement. The FTI is an assessment designed to better understand the changes brought about by cooperatives for their members, as perceived by small-scale agricultural producers themselves. It takes into account several dimensions of economic, social and environmental well-being, providing an overall assessment of their quality of life and the sustainability of their activities. In East Africa, the FTI has focused specifically on small-scale coffee growers. A control group of 1,026 small-scale producers not affiliated to any cooperative or agricultural enterprise was interviewed. Their situations and responses are then compared with those of cooperative coffee growers. SIDI contributed to this study by co-financing, with our partner Aceli Africa and the ACTES foundation, an assessment of the situation of small-scale coffee producers who are members of Abakundakawa, a cooperative located in the north of Rwanda in the poor regions of Rushashi and Minazi. In all, 282 Abakundakawa suppliers were interviewed to better understand their situation and the effects of cooperative membership on their lives.

Abakundakawa, a Rwandan cooperative supported for over ten years by SIDI

Abakundakawa is a producer organization created in 1999 on the initiative of 367 Rwandan coffee growers, with the aim of enhancing the value of their production. From the outset, the organization has been dedicated to purchasing and processing Arabica coffee cherries into high-quality green coffee for international marketing. Over the past 25 years, Abakundakawa has gone from strength to strength, and today boasts over 2,100 active members, 44% of whom are women, 23 permanent employees and 175 seasonal workers. It exports around 19 containers of coffee every year. Abakundakawa’s activities have a strong social mission. Indeed, improving the standard of living of its members is at the heart of the cooperative’s activity. To meet this objective, it charges purchase prices higher than the minimum price set by the government. The organization has been Fair Trade certified since 2005, and has thus been able to increase its impact on social and local development through projects to supply water, improve agricultural access, pay for mutual health insurance schemes, etc.

The study describes producers whose living conditions are particularly fragile

Two-thirds of the producers who responded to the survey are men, owners of their own land, with an average age of 48. The families are large and poorly educated; for 37%, elementary school is the highest level of education in the family. On average, they own 2.7 hectares of land, 44% of which is devoted to growing Arabica for export, the rest to peas, corn and bananas.For half of those interviewed, coffee production is their main source of income. An assessment of their behavior shows that 60% of respondents have incomes below the “Living Income Reference Value”, an estimate of the minimum amount needed to live decently in the region. However, almost all the farmers interviewed want to continue producing coffee, and hope that their children will too.

What Abakundakawa brings to its producers

The cooperative strives to build member loyalty through regular training by agronomists and field agents: 71% are in regular contact with these agents, whom they meet three times a year on average. What’s more, the interviewees’ farming practices are generally more virtuous than those of the control group, with all of them implementing good farming practices and two-thirds practicing agroforestry. Abakundakawa facilitates access to suitable tools (hoe, saw, pruning shears) and cows to promote natural fertilization of plots. It also carries out specific actions in favor of young people and women, and offers a savings service. Thanks to the latter, 53% of respondents say they save every month, compared with only 25% of producers in the control group. These actions are the main drivers behind the very high level of supplier satisfaction with the cooperative, which scores highly on the Net Promoter Score, an indicator that compares the number of promoters of an organization (i.e. the number of people who would recommend the organization to their friends and family) with the number of detractors (people who would not recommend the organization to their friends and family). Abakundakawa achieves a very high score (NPS of 51), a testament to the strong satisfaction and loyalty of its members. These testify in particular: “They teach us how to make coffee, compost, mulch, prune, weed and renovate the field. All these things that the cooperative teaches us are very important for a coffee grower, because they enable him to improve his growing methods in a professional way. I think this is something unique that our cooperative possesses and can benefit all coffee growers.” Woman, aged 61

“I like the way they value their members and offer training so we can improve the quantity and quality of our produce. They also offer premiums and provide cows for breeding so we can get manure easily.” Woman, 62 As in the majority of satisfaction surveys linked to the provision of services, the only subject of dissatisfaction remains the price paid, in this case for coffee. 62% of respondents were dissatisfied with the prices paid by Abakundakawa. However, 62% also claim to have made a profit on the last harvest, and half of them have noticed an improvement on last year in terms of income received. In fact, Abakundakawa pays a higher price than the market price, and the premiums from organic and fair trade certification also enable the payment of a bonus at the end of the campaign. Aware of the crucial contribution made by the cooperative, 80% of those questioned plan to continue investing and developing their coffee production. It’s a safe bet that they will continue to supply Abakundakawa with top-quality fair-trade coffee for a long time to come.

Official launch of the new European solidarity financing fund for Africa, FEFISOL II!

[chapeau]SIDI announces the1st closing of the new FEFISOL II fund, dedicated to financing rural microfinance and small family farms in Africa, at 22.5 million euros, with a technical support envelope of one million euros.[/chapeau]

The FEFISOL II Fund is designed to help meet the crucial challenges of financing vulnerable populations in rural areas of Africa, with a particular focus on financing the agricultural sector.

Financing the agricultural sector is of crucial importance in terms of food security, employment and resilience in the face of climate change, and also in terms of the financial inclusion of women who, despite representing more than half of the agricultural workforce, often do not have the same access to financing as men.

Although it makes a major contribution to many African economies, and its growth directly contributes to poverty reduction, the agricultural sector is still poorly served financially, as it is often perceived as too risky or not profitable enough.

FEFISOL II is structured to provide financial and technical support for solutions designed locally to meet these challenges. The fund will continue to target agricultural entities sourcing most of their supplies from sustainable family farming. It will be managed by Inpulse, a Brussels-based management company – a subsidiary of SIDI and Crédit Coopératif.

In addition to the two founders, SIDI and Alterfin, most of the investors in FEFISOL have renewed their commitment to the new fund. In particular, Agence Française de Développement’s private sector subsidiary Proparco, the European Investment Bank and the French social banks Crédit Coopératif and Banca Etica in Italy have renewed their commitment. New investors are also joining the initiative: the Belgian investment company for developing countries BIO, the Alternative Bank of Switzerland (BAS), and the NGO SOS Faim Luxembourg. The technical support package is financed by Proparco.

These commitments will enable the Fund to pursue its social mission and be even more ambitious in terms of social and environmental performance. FEFISOL II will be implemented in over 28 African countries, and should eventually support 110 microfinance institutions or agricultural companies and cooperatives sourcing from smallholders, most of them Fair Trade or organic certified. The first disbursements will be made in July 2022.

By supporting the implementation of socially and environmentally sustainable practices, FEFISOL II directly aims to improve the living standards of vulnerable populations in rural Africa, reduce inequalities and promote sustainable agricultural development.

Read the press release here

[CP] EIB lends €5 million to FEFISOL II fund

[CP] European Investment Bank lends €5 million to FEFISOL II to finance Africa’s agricultural sector

 

Building on the success of FEFISOL, the first impact fund dedicated to the rural world in Africa, which closed in 2021, its two founders, SIDI and Alterfin, have been actively working on the creation of a new fund: FEFISOL II, created at the end of 2021.

Today, the EIB is announcing its entry into the capital of FEFISOL II for an amount of 5 million euros! This renewed commitment will enable the Fund to pursue and deepen its social mission.

FEFISOL 1 has had a considerable impact over the past decade:

– 86M euros disbursed, of which 93% in Sub-Saharan Africa ;

– 75% of average outstandings in local currency ;

– 92 customers financed in 25 countries;

– 139 technical support projects carried out for 51 customers.

FEFISOL II builds on FEFISOL I’s pioneering support for rural microfinance and the agricultural sector. The challenge posed by the lack of financing for rural areas in Africa, and for farmers in particular, remains crucial.

In Africa, less than 5% of loans disbursed by traditional financial institutions are earmarked for the agricultural sector, and less than 10% of farmers have access to credit. And this despite the fact that around 48% of the population depends on agriculture. Although it makes a major contribution to many African economies, the agricultural sector is still poorly served financially, as it is often perceived as too risky or not profitable enough.

Rural communities face multiple challenges: the remoteness of financing, but also the growing risks induced by climate change, as well as the financial inclusion of women, who represent 60% of the agricultural workforce in Africa without often being able to benefit from the same rights as men.

FEFISOL II is structured to provide financial and technical support for solutions designed locally to meet these challenges. FEFISOL II will be implemented in over 25 countries in sub-Saharan Africa, and is expected to support 130 microfinance institutions or agricultural companies and cooperatives sourcing from smallholders and certified fair trade or organic.

Other investors are joining FEFISOL II for a round of financing that will close at the end of March: the first investments will be effective from May!